Fundamental Analysis: Franc’s Retreat as SNB Remains Loose

The Swiss franc declined somewhat against most major currencies this morning in the aftermath of the Swiss National Bank’s meeting. The SNB kept its target rate stable as expected, but the bank cut its outlook for inflation and said that it still considers CHF to be ‘highly valued’.

The franc has moved back from last night’s highs against the dollar to around Fr 0.993 at the time of writing. Volatility has been higher for EURCHF and GBPCHF though at about Fr 1.13 and Fr 1.31 respectively. Meanwhile the Aussie dollar has posted a strong bounce against the franc since last night to nearly Fr 0.71 in the mid-morning GMT.

Not much surprise from the SNB but some negativity

The decision by the SNB to hold rates was expected unanimously by Reuters’ poll of 32 economists. This sees the central bank’s target range for LIBOR remaining negative 1.25% to negative 0.25% until at least June 13.

Since the global financial crisis, the Swiss central bank has in general made efforts to reduce the franc’s value. The main reason for this is to help Swiss exporters, whose products are less competitive as the franc’s value is higher relative mainly to the dollar and euro. Efforts to keep the franc’s value low through large forex positions and a negative base rate appear to be working somewhat, though still not quite to the extent desired.

Domestically, the SNB painted a mixed picture this morning. The bank still expects GDP growth of about 1.5% this year amid what it calls ‘moderate positive momentum’. This is despite the Swiss government’s cut of its GDP forecast to 1.1%. However, the bank reduced its outlook for inflation in 2019 to 0.3%, which might be justified based on last month's data. Inflation is the more important statistic mainly because it affects monetary policy more directly than GDP.

There hasn’t been much significant data from Switzerland recently. Tuesday’s news though that Switzerland’s trade surplus was up about Fr 600 million in February did give CHF fundamental support. Traders’ titbit recently is the SNB’s latest edition of the Fr 1000 note: it seems that the franc will be a store of value for some time to come.

The latest thousand franc note, worth over $1000.

Next up: Q4 current account

The most important data from Switzerland next week is Monday’s release of fourth quarter current account at 08.00 GMT. Current expectations indicate an increase in the surplus of about Fr 4.5 billion. Traders are also looking ahead to 09.00 on Wednesday when Switzerland’s due to release data on economic sentiment for March. The prediction is for a slight improvement to -12.3.

CHF’s status as a haven means that sentiment in general across markets is very important. Brexit news is of course the biggest driver of ‘risk-off’ in European markets, but traders must not ignore news from the Sino-American trade talks. High-level discussion is due to continue next week, and reports from this can have a major effect on the franc as well as the yen and gold.

Further losses for the franc in view

On the whole, the fundamental picture is somewhat negative for the franc. USDCHF and AUDCHF are likely to continue making some gains into the end of the week. However, EURCHF and especially GBPCHF will probably be volatile with the possibility of some losses.

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